What this lesson teaches
I can tell production from productivity and explain what changes each, including investment.
Syllabus K343, 3.5.3. Production and productivity: the difference between production and productivity; influences on production and productivity; effects of changes in investment on productivity
Make a guess
A bakery's 5 workers bake 500 loaves a day. After it buys a new oven, the same 5 workers bake 600. What happened to labour productivity?
- It stayed the same, because the number of workers is the same.
- It rose by 20%, from 100 to 120 loaves per worker.
- It rose by 100 loaves, the rise in total output.
Show the answer
It rose by 20%, from 100 to 120 loaves per worker.
Productivity is output per worker. The same workers now make more each, because the new oven gives them a better tool.
Production is total output; productivity is output per worker or per hour, and investment usually raises it.
Production is the total amount of goods and services a firm or economy makes. Productivity is output per unit of input, usually output per worker per hour. A firm can raise production by hiring more workers even if productivity does not change.
Productivity rises with better education and training, better technology and machines, better management, and more motivated workers. Healthier workers are also more productive.
Investment means spending on capital goods, such as new machines or software. It usually raises productivity because each worker has better tools. Higher productivity lowers the cost of each unit, so firms can cut prices, raise wages or earn more profit.
Investment also has costs. It takes time to install, workers need training, and the firm must be sure the extra output can be sold.
- Production
- Total output.
- Productivity
- Output per worker or per hour.
- Raises productivity
- Training, technology, investment, better management, motivation.
Worked example: Calculating productivity
A packaging factory has 20 workers who make 4,000 boxes in an 8-hour shift. After buying a new folding machine, the same workers make 6,400 boxes.
- Before: productivity = 4,000 / (20 x 8) = 25 boxes per worker per hour.
- After: productivity = 6,400 / (20 x 8) = 40 boxes per worker per hour.
- Production rose by 2,400 boxes and productivity by 60%, with no extra workers.
- Effect: the cost of each box falls, so the firm can compete on price.
Watch out for this
If a firm produces more, its productivity must have risen.
Production can rise just because more workers are hired. Productivity rises only if output per worker, or per hour, goes up.
Check your understanding
A firm hires 10% more workers and output rises by 10%. What has happened to labour productivity?
- It has stayed the same.
- It has fallen by 10%.
- It has risen by 10%.
Show the answer
It has stayed the same.
Right. Output per worker is unchanged, because both rose by 10%.
Check your understanding
A factory with 100 workers makes 1,000 units a day. It hires 20 more, and output rises to 1,200 units. What happened to labour productivity?
- It rose from 10 to 12 units per worker
- It rose by 20%, as output rose by 20%
- It fell, as more workers share the machines
- It stayed at 10 units per worker
Show the answer
It stayed at 10 units per worker
Right. 1,000 / 100 = 10 before and 1,200 / 120 = 10 after. Production rose, but output per worker did not.